The fourth-quarter profit of $3.05 billion, or $1,847 a share, compares to a profit of $4.38 billion, or $2,663 a share, in the same period a year earlier.
Berkshire's insurance operations, one of the largest portions of the company, reported a $107 million underwriting loss, compared with a profit of $414 million a year earlier. The loss was driven by its car-insurer, Geico Corp., and Berkshire Hathaway Reinsurance Group.
Buffett has long appreciated the insurance business because he can invest customer premiums until funds are needed to pay claims years in the future. Buffett calls these funds "float," and he reported Saturday that the pool of funds rose to about $70 billion from $66 billion a year earlier. Investment income from the insurance operations was about $825 million, compared to $911 million in the fourth quarter of 2010.
A good portion of the quarter's profit decline came from a corner of the company that Buffett has advised shareholders to ignore: Berkshire's derivative portfolio. Gains and losses there are an accounting matter. They don't bring in any additional funds for Buffett to invest beyond what Berkshire was paid when it sold the products years ago--just as significant losses on the derivatives in 2008 didn't result in substantial funds going out the door.
The derivatives portfolio includes $34 billion of notional value in contracts tied to the performance of four stock indexes. Three of the indexes rose in the fourth quarter, and gains on the so-called equity-index puts were $302 million. In the fourth quarter of 2010, when all four indexes rose by double-digit amounts, those gains were $872 million.
In his annual letter to shareholders Saturday that accompanied the release of 2011 results, Buffett said Berkshire "will not be initiating any major derivatives positions" because of a rule change that requires increased collateral if the positions move in the buyer's favor.
"The possibility of some sudden and huge posting requirement--arising from an out-of-the-blue event such as a world-wide financial panic or massive terrorist attack--is inconsistent with our primary objectives of redundant liquidity and unquestioned financial strength," Buffett wrote.
Profit at Berkshire's railroad operation, Burlington Northern Santa Fe, rose 41% to $909 million. Profits decreased 8.1% to $316 million at Berkshire's utility and energy operation.
Earnings at the company's manufacturing, service and retailing operations rose 28% to $856 million.
Buffett, who serves as Omaha, Neb.-based Berkshire's chairman and chief executive, has urged investors to evaluate the firm by how it is growing in relation to the broader market. He often draws attention to Berkshire's book value, a measure of assets and liabilities that he says understates the company's actual value but can serve as an objective indicator of the company's performance over time.
Berkshire's book value increased 4.6% in 2011, exceeding the 2.1% return of the benchmark Standard & Poor's 500 Index. It marks the first time in three years that Berkshire's book value increased more than the return of the S&P, according to data provided by Buffett on the second page of Berkshire's annual report released early Saturday.
Berkshire's own shares fell 4.7% in 2011, prompting Buffett to announce an unprecedented share buyback program in late September. Saturday's annual report showed that Berkshire spend about $49 million on its own shares in the fourth quarter after spending $17.9 million on share repurchases between Sept. 26, the day it commenced its first-ever buyback program, and the end of the third quarter four days later.
"We were in the market for only a few days...before the price advanced beyond our limit," which Berkshire has set as 110% of book value, Buffett wrote in his annual letter to shareholders that accompanies the release of Berkshire's results.
Buffett's cash hoard rose to $37.3 billion at Dec. 31, up from $34.8 billion at the end of the third quarter. At the end of 2010, the figure stood at $38.2 billion.